FCC aims to create retail market for cable set-top boxes

CoreyBoles

WASHINGTON (MarketWatch) -- Starting in July, most U.S. cable companies will start supplying many customers with new set-top boxes under a federal government plan to create competition for the devices.

Cable companies are being forced to introduce them by the Federal Communications Commission, which doesn't feel there is much competition in either the manufacturing or the selling of the boxes.

Set-top boxes, which usually sit atop television sets and allow a customer to receive cable television service, usually are rented to consumers by their cable company. Customers will now have the option to buy or rent.

The cable industry has fiercely resisted the new move, and has appealed to the FCC to delay the measure while it works on the next generation of technology for putting cable signals into people's televisions.

FCC Chairman Kevin Martin is, in effect, using regulation in an attempt to create a marketplace where one doesn't currently exist. He hopes that consumers will go out and buy their own set-top boxes, which will in turn motivate more consumer electronics manufacturers into the marketplace. "Our goal is to end up making sure that there is a competitive market for set-top boxes," Martin said in an interview this week.

The measure doesn't apply to all customers, only to new ones, those who upgrade to digital or high-definition service or those who want a digital video recorder.

But given that most people already have some form of pay television service, it is those upgrading to HD or DVRs who represent the fastest-growing part of the market.

The new set-top boxes will have no additional capabilities other than having the security feature - which determines which channels a customer gets - contained in a removable cable card, rather than imbedded directly into the boxes. A customer can then use the box with another cable company by replacing the card.

For Martin, it's a gamble.

In the short-term, prices are likely to rise for cable subscribers as companies pass on the higher costs of the new boxes.

Added to this, there is little direct evidence that consumers are actually interested in buying a box.

And perhaps most potentially damaging, the head of the cable industry's lobby group has questioned whether cable companies should continue to invest in a different technology which, all parties to the debate agree, would have been a better solution to opening up the marketplace.

Mixed Signals

The new technology, called downloadable security, would enable cable operators to speak directly to a computer chip built into a set-top box or the television itself. This technology would remove the need forcable cards while still allowing for standalone set-top boxes not linked directly to a particular cable operator.

"There's a substantial question of whether it's worth investing in downloadable security now unless we can get a clear signal from the FCC that it would look favorably at it," said Kyle McSlarrow, chief executive of the National Cable & Telecommunications Association.

The cable industry argues that it has been investing heavily in downloadable security, but that the pressure from the FCC to comply with its July 1 deadline for the new set-top boxes has forced it to put that on the back burner.

"Our time, money and resources would have been better spent on something like downloadable security that would allow a real competitive marketplace to develop," said McSlarrow. "This requirement has in fact delayed the introduction of downloadable security."

For his part, Martin agrees that downloadable security would have been better, but says he wasn't willing to wait any longer for a technology that remains unproven.

"Do I think that downloadable security would be better? Absolutely. But I thought it was important that we had a date by which that could be achieved," he said.

As for whether consumers want to buy their own set-top boxes, there's no evidence of such a desire, one independent analyst said.

Olgeirson said that while large consumer electronics manufacturers are interested in getting involved in the cable industry at some stage, they're not "champing at the bit" to get involved in the production of current set-top boxes.

He said the new boxes will cost cable companies between $45 and $55 more per box, meaning that a new box could cost around $130.

"This cost will be passed onto consumers in some form," said Olgeirson.

In the short term, the July 1 deadline will in fact bolster the stranglehold over the set-top box market by the two dominant players.

Between them, Motorola Inc.
MSI, -0.29%
and Scientific Atlantic, a unit of Cisco Systems Inc.
CSCO, +0.57%
control around 80% of the current set-top box market. The two have been busily filling cable companies' orders for the card-enabled boxes.

Motorola spokesman Paul Alfieri said that even if in the long run the company loses market share, the overall size of the cable market will continue to grow, offsetting that loss.

Some consumer electronic manufacturers say they intend to compete in the leasing market, but few anticipate a retail market for set-top boxes.

"We are already building a set-top box for the lease market," said Dick Strabel, vice president of cable products at Panasonic Electronics. Last year, Panasonic announced it will supply Comcast Corp.
CMCSK
with at least 250,000 boxes annually, starting later this year.

Strabel said he doubts whether a retail market for set-top boxes will materialize.

Best Buy Co.
BBY, +1.89%
the largest U.S. consumer electronics retailer, agrees. Brian Lucas, a spokesman, said the company is "unlikely" to sell the new boxes, but when the next-generation two-way cable cards or downloadable security become available, the company would probably start selling boxes and television sets enabled with the technology.

Two-way security would allow customers to communicate with their cable company using just their remote control. They could order programs, download music, change their subscription package, pay their bill and do any number of other functions that haven't even been considered yet.

For at least one manufacturer, however, the FCC decision to enforce the rule means it will finally be able to start selling its boxes in retail stores.

Mike Fidler, chief executive at Digeo, said he hopes to have the company's digital recorder set-top box on the shelves by the third quarter of the year.

"We fundamentally agree with the FCC's move to open the marketplace up," said Fidler. "There is a need to stimulate innovation and to open the market up to competition."

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